Let's go through these two workouts on treasury inflation-protected securities. We have an investor here that bought 10,000 US dollars face value of TIPS with a 2.5% semi-annual coupon. When the CPI increases by 0.5%, what is the adjusted principal value of the TIPS? And how much is the next coupon payment? Now the beginning principal, as well as the coupon rate, already filled in, so we can get straight to the change in CPI and we've been told that this was 0.5%. To calculate the adjusted principal, we simply have to multiply the beginning principal with one plus the change in CPI, and we get an adjusted value of $10,050. When the coupon rate is 2.5%, the coupon payment based on the adjusted principal will be $125.63. Remember, we have to divide the coupon rate by two to reflect the fact that coupons on TIPS are paid semi-annually. In workout B, we look at the next coupon period. CPI has increased by 0.25% but this time the beginning principal is not $10,000. It is actually the adjusted principal of the previous period, which was $10,050. The coupon rate remains unchanged at 2.5%, and as mentioned, the CPI increase is 0.25%. We can now calculate adjusted principal and coupon payment exactly as in workout A.

And that's the result. The adjusted principal after the second period is $10,075.13 and the coupon payment should be $125.94.